Local Bounti Corporation (NYSE:LOCL) Q1 2023 Earnings Call Transcript

Local Bounti Corporation (NYSE:LOCL) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good morning, and welcome to the Local Bounti’s First Quarter 2023 Earnings Conference Call. [Operator Instructions]. At this time, I’d like to turn the conference over to Jeff Sonnek, Investor Relations at ICR. Please go ahead.

Jeff Sonnek: Thank you, and good morning. Today’s presentation will be hosted by Local Bounti’s Co-CEOs, Craig Hurlbert and Travis Joyner; President, Brian Cook; and Chief Financial Officer, Kathleen Valiasek. The comments made during today’s call contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements. These statements are based on management’s current expectations and beliefs as well as a number of assumptions concerning future events. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements.

Some of these risks and uncertainties are identified and discussed in the company’s filings with the SEC. We’ll also refer to certain non-GAAP financial measures today. Please refer to the press release, which can be found on our Investor Relations website, investors.localbounti.com, for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. With that, I’d now like to turn the call over to Craig Hurlbert, Co-CEO. Craig?

Craig Hurlbert: Thank you, Jeff, and good morning, everyone. We started 2023 on a strong note with the first quarter performance that was consistent with our plan. As we move into the second quarter, our growing operations are progressing nicely. Most recently, with the completion of our Georgia 6-acre greenhouse facility in April and the advancement of our new facilities in Texas and Washington. But perhaps most importantly, we put the financial resources in place to support our business for the long term. This was no small feat given the current economic environment. As we communicated on our last earnings call, we expanded our credit facilities with Cargill by up to $110 million with simultaneously relieving cash needs to fund our operations.

Just last week, we built upon that support with the closing of a $35 million sale leaseback transaction. This cash, combined with the cash available from our Cargill amendment, provides us with approximately $58 million of accessible cash to run our operations and scale up our business with the intent to reach breakeven adjusted EBITDA by the end of 2024 or early 2025. Our entire team continues to push our national platform ahead into the future, constantly learning from our own trials and the mistakes of others to become the most capital-efficient CEA platform in the industry. Travis will speak to some of the operational gains that we are realizing with our Stack & Flow Technology in Georgia today and also speak to some additional productivity levers that we will be implementing in the future.

These are extremely exciting advancements which demonstrate our unique ability to squeeze the most out of our assets to maximize revenue and cash flow while delivering long-lasting, delicious and sustainably grown products to over 10,000 locations nationwide. Our Stack & Flow Technology continues to underpin our business model as the optimal capital-efficient tool to enhance crop turns and maximize return on investment across a variety of CEA approaches. Beyond our greenfield expansions, the inherent flexibility of our approach also affords us other opportunities to achieve greater scale quickly through strategic acquisitions. We are proving that we can continue to drive top line growth and simultaneously generate healthy margins as we scale the business in a responsible, capital-efficient manner.

This is due, in large part, to the continued gains we are making with our Stack & Flow Technology to drive improving unit economics, which our Co-CEO Travis Joyner will speak to. And then our President, Brian Cook, will provide some further commentary around progress on our various construction projects before our CFO, Kathy concludes with her financial review and financing update. I am so grateful to work with such a committed and talented team here at Local Bounti. Our success is a direct result of their collective efforts, and I’m honored to help lead this business on behalf of our employees and our stakeholders. With that, I’ll pass it over to my friend Travis.

Travis Joyner: As Craig noted, maximizing our Stack & Flow Technology is foundational to our strategy and will demonstrate the economic advantages of our CEA approach and help us achieve our long-term financial goals. The Stack & Flow is immensely productive and our relentless focus on optimizing the technology continues to deliver impactful results that will cascade through our facility network. Today, our Stack & Flow-enabled production at our Georgia facility, which at this stage is limited to a single stack zone, is online in achieving trial production yields 40% to 70% higher than the rest of the greenhouse. As we complete the full stack integration in Georgia, yields will increase over time as we solve to optimize facility output.

Our successful integration of Stack with the dynamically indexed gutter system in the Georgia greenhouse will drive enhanced yields with significant automation and labor savings compared to our first facility in Montana. At scale, we believe that these enhancements allow us to outcompete the best greenhouse growers by approximately 50%, and the average greenhouse grower by 75% to 100%. Our production statistics are the proof that Stack & Flow generate 1.5 to 2x the yield of traditional greenhouse growing methods. But we aren’t stopping there. While we feel great about the productivity enhancements within the greenhouse, we have similar initiatives in place for our vertical stack production. Through additional optimization of the vertical growing environment, we see an ability to increase output at the early stage of our system by another 20% beyond what we are currently achieving.

This is of critical importance for our business and is foundational to our capital efficiency ethos at Local Bounti. Not only do we realize the operational benefits of the higher rates of production on our fixed cost base, but these same gains create direct proportionate savings on future capital expenditures. This relationship is highly advantageous and demonstrates our rigorous approach. We do the math on every decision, including the vetting and implementation of technology to improve unit economics. I’ll pass it over to Brian for his remarks.

Brian Cook: Thank you, Travis. In terms of our scale up, our workflows are focused on completing projects that generate near-term returns. With that in mind, we are working on completing our Georgia build-out, finishing our Texas facility in the fourth quarter of this year and our Washington facility early in the first quarter of 2024. With respect to Georgia, construction of Phase 1-B was completed and seating began in April. As a reminder, Phase 1-A and 1-B reflects the site’s completed 6-acre automated greenhouse footprint. The completion of the 6 acres will effectively drive distribution of Local Bounti products across the Southeast by the end of Q2 through multiple selling channels. While we have a single stack zone on — or vertical nursery operating within the facility, it is largely a horizontal greenhouse at the moment.

That will all change once we integrate the rest of the complementary stack zones that comprise Phase 1-C. With the additional capacity brought on with the Stack technology, we will have the ability to open up our product suite to new offerings, strengthening our position as the premier partner in the CEA space. We continue to expect this work will be completed and online early in the fourth quarter of 2023, allowing Local Bounti to deepen our roots in the Southeast. Our new 6-acre facility in Texas is advancing nicely with recent completion of the pad and foundation. The similar design of this facility to that of Georgia will allow for synergistic operations and management of the 2 facilities. As mentioned, Texas will support production of our packaged leafy green varieties as well as locally grown living lattices and fortify our national distribution network with localized facilities coast to coast across the southern U.S. We continue to expect operations at Texas to commence in the fourth quarter.

The pad and foundation work are also complete at our Pasco facility. True to Local Bounti’s mission to deliver superior unit economics, the facility will be comprised of 3 acres of greenhouse that will be supported by multiple stack zones. The location will help bolster the company’s distribution capabilities in the Pacific Northwest and is expected to commence operations in the first quarter of 2024, which continues to reflect our strategy of staggering construction to accommodate the commissioning of our Texas facility in the fourth quarter of 2023. Commercially, I’m excited to see a 13% increased velocity improvement in our current portfolio from 2022 levels as Local Bounti continues to resonate with consumers over quality and freshness.

Our mature regions continue to grow and timing scale velocities in new markets has shortened with successful market strategies. On that note, we are thrilled to confirm we have started shipping to 2 new distribution centers recently from our Georgia facility with 2 additional [indiscernible] distribution centers set to come online by the end of the second quarter as mentioned on our last earnings call. These are great wins for Local Bounti and reflect our increasing scale and ability to service large retail customers. Now, I’ll turn the call over to Kathy for her review of the financials.

Kathleen Valiasek: Thank you, Brian. I’ll cover our first quarter results and provide a review of our recent financing activities. First quarter 2023 sales were $6.7 million as compared to $0.3 million in the prior year period. Our first quarter results largely reflects production from our California facility and to a lesser extent, our Montana and Georgia Phase 1-A facilities. As previously discussed, we expect improved revenue run rates in second quarter from Georgia with the recent completion of Georgia Phase 1-B’s additional 3 acres of growing space. With this work now complete, we are beginning to fulfill demand and make preparations for the 4 additional distribution centers that will fold into our network during second quarter.

And of course, later in the year, our Phase 1-C will be complete and come online further increasing the revenue out of that facility. First quarter 2023 adjusted gross margin, excluding depreciation, stock-based comp and other non-recurring items was approximately 33%. Adjusted gross margin was impacted by persistent heavy rains, which shut down roads at our California facilities and caused temporary production and delivery interruptions. We also saw reduced customer demand in the Western markets we served as customers made fewer shopping trips during this time due to the inclement weather. First quarter 2023 net loss was $23.5 million as compared to a net loss of $25.8 million in the prior year period and includes $6 million in stock-based comp, $4.3 million in interest expense, $3.5 million of depreciation and amortization, $1.7 million of business combination and integration costs and $0.7 million of increased utility costs related to inclement weather.

Adjusting for these and other discrete items, adjusted EBITDA loss was $7.4 million as compared to adjusted EBITDA loss of $8.5 million in the prior year period. From a capital structure perspective, we ended the first quarter March 31, 2023, with cash and cash equivalents of $7.5 million. However, obviously, this doesn’t reflect the incremental financing transactions that we put in place, which provided approximately $58 million of accessible cash to our balance sheet to fund our operations. As we previously announced on our last call, at the end of March, we amended our agreement with Cargill to expand our existing credit facility by up to $110 million to a total of up to $280 million. This expansion provides capital to fund construction at our facilities in Georgia, Texas and Washington.

Just last week, we closed on the second component of the financing via a sale leaseback of our 2 facilities located in California for $35 million. This cash, combined with the cash available from our Cargill amendment provides us with approximately $58 million of available accessible cash to support our operations. With this cash in place and access to construction financing via our agreement with Cargill, our focus is shifting to optimizing our capital structure, the results of which would reflect our efforts to lower our total cost of capital. We may pursue additional sale leasebacks for our other facilities in addition to utilizing approximately $90 million of debt funding from a licensed USDA lender to reduce our use of construction financing and replace it with lower cost debt.

I’d note that we added $10 million from this funding source as compared to our last update with you. We anticipate closing on the first $35 million of this funding in the second quarter with the remaining $55 million closing to be completed at a future date. Naturally, we are very excited about these developments. They provide us with the necessary capital to reach breakeven cash flow by the end of 2024 or early 2025, which is a very important milestone that we’ve been working hard to achieve. As of March 31, 2023, we had approximately 104.2 million shares outstanding. On a pro forma basis, including warrants and our employees’ restricted stock units outstanding, we have a fully diluted share count of approximately 197.4 million shares. With respect to our outlook, we are reiterating full year 2023 revenue guidance of between USD34 million and USD40 million, representing growth of at least 74% as compared to the end of 2022.

In terms of our quarterly cadence, as I mentioned, we expect revenues to build sequentially through the balance of the year as our Georgia production stepped up with the completion of Phase 1-B in April and the 4 additional distribution centers we are beginning to serve this quarter. Following this, the next lever will be the impact of stack Phase 1-C’s completion in the fourth quarter, which will increase production by 40%. This is expected to have a commensurate positive influence on our adjusted EBITDA as well, which should gradually improve through the balance of the year, building from the low point we established in the first quarter we reported today. Once again, we believe we have line of sight to positive adjusted EBITDA. And finally, I’d also note that the impact of any potential acquisitions as part of our build and/or bid strategy for growth could potentially change this expectation.

We believe this demonstrates the flexibility of our model and the advantages of our approach, which revolves around capital efficiency. That concludes our prepared remarks. Operator, please open the call for questions.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Colin Rusch with Oppenheimer.

Operator: Our next question comes from the line of Ben Klieve with Lake Street Capital.

Operator: Our next question comes from the line of Chris Barnes with Deutsche Bank.

Operator: [Operator Instructions]. Our next question comes from the line of Brian Wright with ROTH MKM.

Operator: Thank you. Ladies and gentlemen, there are no further questions. This concludes our Q&A session. I’ll turn the floor back to Mr. Hurlbert for any final comments.

Craig Hurlbert: Thank you so much. I would just like to thank everybody for joining us this morning, and we sincerely look forward to speaking with you all again. In the meantime, we’re back at it. Everybody, have a great day. Thank you.

Operator: Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.